No bull, this year is all about traders

This year will more likely favour traders than investors, feel market mavens, with indices moving in a wide trading range amid high volatility as equities seek the bottom.

The first half of this calendar year, in particular, is likely to see higher daily swings, given the uncertainty stemming from global events and declining domestic economic growth.

“Unlike 2011, when markets were bound in a most narrow range in at least two decades, 2012 is expected to see a wider trading range, making it attractive to trade actively,” Vijay Gaba, equity strategist at DSP Merrill Lynch, wrote in a note to clients on Monday.

According to Gaba, volatility could increase as the market begins the process of forming a strong cyclical bottom towards the middle of the year.

“Volatility has been persistently low in the past couple of years with the Sensex having recorded daily moves of 3% or more only on nine occasions during 2011. This is unlike 2008, when the market recorded all-time high volatility — there were 67 large moves of more than 3%, out of which 25 were larger than 5%. The year 2009, when the market created a cyclical bottom, also saw 42 large daily moves, out of which six were more than 5%. In our view, as the market moves towards bottoming out in 2012, the daily volatility may increase substantially,” noted Gaba.

The India VIX, the ‘fear gauge’, remained in a range of 17-30% during 2011, with only a few instances during the August-October period when it rose to as high as 35%.

Piyush Garg, chief investment officer at ICICI Securities, concurs.

“The markets have seen big monthly moves of close to 7-10% on either side in the last 2-3 months and there is no reason to believe things will change soon. In these uncertain times, even a small positive news seems too big for investors and in such a case, the markets are likely to remain tricky in the first half. However, there may not be sustained downside as there’s no consistent selling pressure seen,” he said.

The Sensex is seen subdued in the near term and the advice is to use the dips to buy at around 14500 levels and sell on upsides around 18000.

“Indian equities are likely to head lower in the first half led by the falling growth, worsening domestic macro fundamentals, deteriorating earning profile, slowing global economy and elevated risk of more adverse outcome from Europe. Strictly in technical terms, Sensex can test levels of 13500-12200 after having broken strong support at 16000 area. We see the likely fall in equity prices as a ‘big’ trading opportunity as we believe we could end 2012 with a positive return if we see aggressive rate cuts by the RBI and government takes policy decisions to kick-start investment spend,” wrote Gaba.

For those looking to invest large sums of money, experts advise waiting for 3-6 months after the interest rate cycle reverses and the government starts taking some action post state elections.   

“The RBI will probably change its course in the second quarter and the change in the interest rate cycle is likely to be a key trigger for a change in direction for the markets as well,” said Rikesh Parikh, vice-president, equities, Motilal Oswal Financial Services.

“The year 2012 would see Indian macros improve with falling inflation and declining interest rates along with growth rates, which may be lower as compared to earlier years but much better than those of global developed counterparts. In such a scenario, commodity prices may see downside, thereby aiding India’s cause. However, markets are unlikely to rally soon as the macro-to-micro transition phase will happen with a lag. Markets are likely to bottom out somewhere in the middle of the interest rate down cycle,” said Garg.